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PARALLAX WEEKLY – 9.4.19

Where Macro Meet Markets


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Confirmation bias is a type of cognitive bias where selective perception emphasizes ideas that only confirm one’s beliefs. The selective perception of cognitive bias also ignores or devalues information that may contradict one’s beliefs.

By not objectively processing all incoming data, one has a propensity to strengthening confirmation bias. Falling prey to confirmation bias is very common and can be easily done by attaching additional value to data or instances that strengthen strongly held beliefs and devaluing anything contradictory to those beliefs.

Confirmation bias is common throughout all belief systems whether economic, political or religious ideologies. Those that follow financial markets tend to see this play out in real-time.

Quite often, data is framed in such a way in order to confirm their hypothesis. Frequently, when someone is overly bearish on the economy, they will only present data in such a way that it looks overly negative or won’t include contradictory positive data at all.

One of the most glaring examples, today, is Tesla. Much like during the 1990s Dot Com bubble, anyone who shared negative data or a mere warning that things aren’t as great as they seem were met – and often harassed – by confirmation bias-wielding sycophants. There always seems to be an excuse to devalue someone’s opposing data points.


For instance, say you’re an investor in Tesla and come across a press release that Tesla is having operational issues with its “Autopilot” system and potential causes of difficulty. In the same press release, it talks about the next best product unveiling later this year.

Would you ignore the “Autopilot” difficulties and research the new product unveiling? If so, you likely suffer from confirmation bias.

Use conflicting or negative data to strengthen your conviction by testing it against your thesis. Never ignore or downplay the value of information.


(DXY, M)

The dollar is on the war path as the dollar liquidity situation intensifies. The monthly price action is beginning to challenge an ascending channel which will begin to move into the path of the 2002 downtrend (pink line).

The ascending channel and multi-year downtrend intersect around 100 on the DXY, but the TACVOL top is approaching on the near-term and intermediate time frame.

The CBOE Euro FX VIX (EUVIX) has ramped through 7.05 and now in overbought territory. A pullback in euro volatility will likely negatively


impact the dollar’s near-term trajectory as it, too, is extended. A pullback is warranted but no unwelcomed.

(DXY, W; The AE7 FX Index, bottom, orange)

Here is the DXY on the weekly chart but with the same monthly ascending channel and 2002 downtrend line. We’ve grouped it again with the AE7 FX index which is comprised of the top seven Asian exporter currencies.


The AE7 inversely correlates to the DXY. As Asian export nations experience slower growth their FX deteriorates which helps lower U.S. import prices. The dollar, in turn, strengthens.

The AE7 index is coming up on an important support level. If broken, the dollar’s move would accelerate. However, if the support holds and the index rebounds, the dollar will likely pullback from current levels.

Global manufacturing PMIs are in the global growth doldrums with less than 70 percent of PMIs expanding. This has been largely focused around confidence surrounding the Trade War; and this has impacted the hard data. If confidence can rebound, a sustainable rebound could incur.

Over the last 5Y, the AE7 FX index is down 8.09 percent v +15.67 percent for the DXY. YTD, the AE7 is down 1.3 percent v +1.4 percent for the DXY.


(DXY, W; Systemic Dollar Risk FX, bottom, green)

Those currencies the most likely to see systemic risk of an accelerating dollar (TRY, CNH, CLP, RUB, BRL, etc) are currently breaking down against the dollar causing the index to break out of a 10-month downtrend.

These currencies are largely emerging markets and carry the most dollar-denominated debt. As the dollar rises, these countries, who’s currencies are depreciating, will have trouble servicing their dollar debt.


(Bloomberg Commodity Index Futures, top; Commodity FX, bottom, yellow)

The downward trend in commodities have been a solid reflection of global growth which began to peak in Q4-17/Q1-18. The Bloomberg commodity constant contract is down over 12 percent YTD.

The commodity FX basket (AUD, NZD, RUB, BRL, CLP, CNH, NOK, CAD) is approaching the 2016 bottom. The Bank of Canada and Norges Bank are the only with upward trending interest rate patterns, though a rebound in commodities and lower rates could aid in FX boost.


(Gold/Silver Ratio, orange; US Headline CPI, white)

As stated in previous reports, the gold/silver ratio is quite unique as it acts as an overall reflection of US CPI. Gold is tied closely to Fed policy, while silver acts as the reflationary trigger.

The ratio is down substantially from its July highs – highest point since it broke 100 in 1991. This could mean something to bond bulls as the ratio tends to top between two and four months prior to bonds.

This has implications to the massive rally in U.S. yields, if not globally.


(Gold/Silver ratio, orange; Gold/Platinum ratio, blue; Gold/Palladium ratio, light blue – all inverted)

Here are the inverted gold/silver ratio, the gold/platinum and gold/palladium ratios, and they are signaling the outperformance of white metals compare to gold.

All three white metals are used in heavy industry. This may not be sniffing out a manufacturing rebound as the global malaise continue, but it could be telling markets that higher commodity prices could be around the corner.


(Copper/Gold ratio, blue; US 10Y Yield, yellow)

The copper/gold ratio is a dead ringer for the U.S. 10-year yield as it acts in a similar fashion to the gold/silver ratio. However, the copper/gold ratio is beginning to tick up; and gold is beginning to underperform other metals.

If the strong correlation holds true, we will be looking at higher 10-year yields. In the recession global markets positioned for, copper net-shorts are at an all-time high with prices stagnating between 2.50/55 with a 20-day z-score of -2.34. Copper is near-term bullish.


(Copper, Weekly)

While everyone was bullish copper, believing in the Chinese credit story, we were bearish between 2.90/95. Our initial target was perfectly placed at the 2016 uptrend near 2.64.

Prices overshot as the surveyed manufacturing data around the world continued to deteriorate, but the rate of change deceleration in price is slowing as markets remain vastly short. The risk of a squeeze is palpable. TACVOL range top at 2.65.


(Gold, bottom; Gold Proxy, purple, top)

The gold price proxy is comprised of FX and interest rate instruments which help guild us with gold futures trend and inflections. Currently, the pricing proxy is topping, and gold prices are looking to retest near-term support of $1,520.

A close below this should trigger selling to $1,480. Gold has been tricky and largely directed by headline risk. If the gold/silver ratio continues to decline, this could reflate real yields. If that occurs, gold is seriously in trouble.


(DRIP. Top, pink; SPY/TLT, bottom)

There is now a “triple bottom” on the SPY/TLT with out DRIP indicator consolidating slight below the 2018 low. The SPY/TLT ratio is one of the best reflation/deflation indicators out there, and our DRIP is a coincident, market-based indicator that helps pull market sentiment.

If the demand zone holds, the SPY/TLT will target 2.20 on the ratio, which will be confirmed by our DRIP. Both are very bad news for bonds in the near-term.


(WTI Crude, top; OVX, bottom, blue)

The positive feedback loop in oil and inflation expectations are evident. As markets price in lax Fed policy on declining growth expectations, it hits oil. The hit in oil then hits inflation expectations.

However, the OVX (oil volatility) is turning lower as prices consolidate within a wedge. Lower volatility means higher oil prices, and a breakout of the wedge will catapult prices to our TACVOL range top of $62.

Inflation expectations could languish until oil can hold potential gains.


(Coffee, top left; Soybeans, top right; USDBRL, bottom; Coffee/Soybean composite, bottom, yellow, inverted)

A boost in commodity prices and thus the real? With coffee and soybeans being leading exports out of Brazil, traders use the real as a proxy for these markets.

With coffee approaching a demand zone and soybeans consolidating, we find the real at an interesting juncture with the USDBRL at the near-term TACVOL top. Regained real strength will push the Coffee/Soybean composite (inverted) lower.


(USDHKD, blue; CNYUSD, red; HIBOR current month minus next closest month, purple, middle; HIBOR 1M, bottom, blue; HIBOR 3M, bottom, purple)

The direction of the Hong Kong dollar is predicated on two things: whether Beijing is using the HK financial system to borrow dollars and what HK interest rates are doing.

When the spread between the first and second 1M HIBOR steepen, it acts as a huge boost for the USDHKD. When this occurs, the 1M and 3M HIBOR futures diverge. However, if the 1M converges (interest rates higher) then the HKD will see strength. This could negatively impact the CNY.


(EURUSD, blue; CNYUSD, red; EURUSD, bottom)

Both the euro and the yuan are in dire straits. The EURUSD cannot achieve any sustainably move above 1.13 as we continue to hunt for parity with the dollar. The move could gain further momentum if the yuan continues to struggle and the dollar remains poised to hit triple digits.

Near-term, the EURUSD to hit 1.085 and USDCNY 7.19. With the expectations of the Treasury sucking out dollar liquidity via debt issuance, the CNY should weaken future.


(USDJPY, blue, top; US10/2 Yield Curve, orange, top; USDJPY, bottom)

The USDJPY is approaching our TACVOL intermediate bottom of 104.15 as price trades within the apex of a huge two-year symmetrical triangle.

If the pair holds within both the technical and quantitative support levels, this is yet another indication U.S. yields could move higher. We would target the near-term TACVOL top at 108.40.


(2-year z-scores of the U.S. 2-, 10- and 30-year yield)

The move in U.S. yields has been shocking but not unprecedented. If we look at the 2-year z-scores, we see that the 2-year yield is the least extended though approaching -2 deviations.

The 10-year yield z-score is reaching levels last seen since the financial crisis and the bond kerfuffle in the early-90s.


The 30-year yield is at the second most extended point going back to 1989.

What this means for bond bulls is the risk of a yield squeeze that would make even the most ardent bull queasy.

The long end is at most risk which means the 10s/2s curve can steepen out of inversion. The TLT is less than one percent from our near-term TACVOL top and hasn’t hit our intermediate bottom since OCT 29, 2018.


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